by George Tyler on January 10, 2019 on American Prospect

​Democratic senators are embracing the idea of putting employee representatives on corporate boards—which could bolster not just worker power and income but American democracy as well.

Nearly one-third of Senate Democrats have now backed bills by their colleagues Tammy Baldwin (Wisconsin) and Elizabeth Warren (Massachusetts) that require corporations to shift to codetermination—the practice of employee representatives joining shareholder representatives on corporate boards of directors. This new push for codetermination is a shrewd way to dramatize how American-style shareholder capitalism has battered wages, job security, and respect for workers. More important, it is a proven and effective different model of capitalism that will improve the lives of American families left economically adrift since the 1980s.

Following the doctrine of “maximizing shareholder value” for the past 40 years, corporate boards controlled by large-scale shareholders have funneled their revenues to those shareholders and the corporate executives whose pay is linked to shareholder rewards—at the expense of investment and wages. Pandemic short-termism in American C-suites since the Reagan presidency is responsible for the long-term decline in private investment documented by the Federal Reserve Bank of St. Louis, the World Bank, and the OECD. Employee up-skilling has stagnated for the same reason, compounded by the gig economy, contracting out and the decline of collective bargaining. Corporate cash flow has also been steadily diverted from wages—labor compensation for more than four decades lagging productivity growth. The deterioration in income equality has caused the U.S. income distribution to become the most skewed of any rich democracy, comparable to that of Turkey.

Eager to shed jobs whose pay and benefits come to $80,000 jobs, boards of directors have become adroit at exporting jobs rather than goods and services. Evidence developed by Robert Scott for the Economic Policy Institute and others affirm that U.S. multinationals have exported five million jobs net since 2000. Consequently, the domestic share of U.S. multinational global employment has fallen below the U.S. share of their global sales according to Department of Commerce surveys.

Offshoring has exacerbated the chronic U.S. trade deficit. President Trump has criticized America’s deficits with both China and Germany (“bad, very bad”), but the factors responsible are quite dissimilar. China pursues classic mercantilist policies, but Germany is bound by EU-wide tariff and trade agreements that emphasize freer trade and maintenance of a stout rules-based international trading order. The German advantage, by contrast, is in part the consequence of policies rooted in its embrace of codetermination.

It is true that Germany exhibits a strikingly large current accounts surplus (8 percent of GDP in 2017). But it’s not an outlier among its northern European neighbors, including the Netherlands (surplus of 10.2 percent), Denmark (7.9 percent), and Norway (5.2 percent). These are the most competitive economies on earth despite paying the world’s highest wages. A portion of their surpluses reflect public sector fiscal sobriety, German wage moderation prior to the Great Recession and membership in the Eurozone. But a significant factor is the focus of corporate boards of directors in these nations on expanding the domestic stock of high-wage jobs—jobs that tend to cluster in high-productivity export sectors.

Codetermination and Corporate Governance in Northern Europe
The enigma of northern Europe’s robust international competitiveness is explained by codetermination—what to American eyes are the unusual dynamics at the very peak of their domestic corporations: a stakeholder orientation reflecting the inclusion of employee representatives on their boards of directors. Consequently, the boards of northern European firms embrace policies to nurture long-term firm prosperity as well as local and national communities. These boards also eschew practices characteristic of American-style shareholder capitalism. Stock options offered to top executives are far smaller than those in the U.S., and their boards reject pathologies such as buybacks designed to spike quarterly earnings. An INSEAD analysis identified only 210 announced buybacks among German enterprises between 1998 and 2014 compared to 11,096 by U.S. firms.

Codetermination is rooted in nineteenth century European corporate reforms (for more details, see, the European Trade Union Institute, and Ewan McGaughey and Rebecca Zahn). Its resurrection in the wake of World War II is the central feature in the half-century evolution of European postwar corporations. At most midsized and larger firms, elected representatives of employees sitting on Boards of Directors have voice and vote equal to those of shareholder representatives; they are jointly responsible for monitoring firm operations, the appointment and dismissal of CEOs and management, crafting strategic and tactical investment direction, and holding management accountable to board, ethical and legal strictures. The other important feature of this model has been works councils, employee/management bodies that meet regularly on a host of mid-level management issues like scheduling and workplace changes.

Had these evolutions diminished firm values or efficiency, codetermination and works councils would have been abandoned decades ago by lawmakers. Instead, they have spread from Germany to two-thirds of the EU. Indeed, codetermination is commonplace at German, Dutch, Austrian, and Scandinavian (including Finnish) corporations. The legal threshold for codetermination governance ranges from firms with more than 25 employees in Sweden to 1,000 employees in Luxembourg (in Denmark, it’s 35; the Netherlands, 100; Norway, 200; Austria, 300; Germany, 500). In most of these nations, employees hold one-third of the board seats, but they hold 50 percent at the largest German corporations, with ties broken by board chairs if needed. Most Americans would be surprised to see who sits on the Board of Directors (Supervisory Board) at any larger German firm such as Daimler.

One reason codetermination and less plutocratic economic policies prevail in these European nations has been their criminalization of political bribery. Political donations of any nature above de minimus amounts are illegal, reflecting the judgment of the late U.S. Senator Russell B. Long that “Almost a hairline’s difference separates bribes and contributions.” The European rejection of pay-to-play means public policy outcomes do not reflect an American-style income bias documented in the seminal analysis by Martin Gilens and Benjamin Page. Policy preferences of the donor class are far more predictive of U.S. legislative outcomes than are middle-class preferences.

Across Northern Europe, codetermination has been a major contributor to opportunity creation.Across Northern Europe, codetermination has been a major contributor to opportunity creation. Its impact on corporate cultures, investment, wages and national labor practices can best be assessed against the outcomes of the U.S. shareholder corporate culture. The stakeholder orientation of their corporate boards has prioritized enterprise longevity and international competitiveness along with shareholder returns. We can see the difference between their economic model and ours by tracking the differences in wages, investment, and domestic labor markets.

Corporate boards and national leaders in these nations may have drawn inspiration from Adam Smith’s argument that hewing to market-determined labor compensation is inappropriate when it’s in conflict with important social objectives. Wages should be sufficiently high, he wrote, to cover “whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without” (including, he wrote in 1776, linen shirts and leather shoes). In nations practicing codetermination, inflation-adjusted compensation tends to track productivity.

The steady rise in the rewards for work has been a vital element in expanding opportunity—rising enough to have leapfrogged the rewards for work in the U.S. Bureau of Labor Statistics and Eurostat data show labor compensation per hour (including employer social costs) in Austria, Germany, and the Netherlands is now about 10 percent higher than it is here, and the gap is even greater in Scandinavia. Conference Board data on labor compensation in the capstone manufacturing sectors alone display a similar pattern. Only American union members earn northern European-level wages.

In contradistinction to U.S. corporate boards that prioritize short-term boosts to share value, codetermination boards establish investment policies that nurture long-term firm prosperity and bolster local and national communities. These policies have engendered über-competitive and innovative enterprise cultures that turn out numerous best-in-class products. Robots to streamline production and drive productivity are nearly fivetimes more common now in Germany (7.6 per thousand workers) than in the U.S. (1.6). Unsurprisingly, sectors dominated by skilled jobs in the nations practicing codetermination are larger than they are here; the skilled-job sector in the Netherlands, for instance, which encompasses 47 percent of that nation’s jobs is nearly one-third larger than that in the U.S (36 percent).

Some American corporations, venture capital, and private hedge funds do invest large sums in research. But R&D spending as a share of GDP by the business sectors of countries like Denmark, Germany, and Sweden is greater than it is here. Indeed, by prioritizing long term firm prosperity, codetermination partnership boards bolster their domestic ecosystems in science, labor skills, technology and innovation. In contrast, American C-suites drain resources from upskilling and investment, choosing instead to spike their share price.

Higher wages, robust investment, and large skilled-job sectors reflect the focus of codetermination boards to foster local and national communities by expanding the number of high value jobs rather than exporting them.  A recent Ernst and Young study of the premier German firms that comprise the DAX 30 index (including such companies as Daimler, Siemens, and Volkswagen) concludes that those corporations have increased domestic employment by more than the growth in their domestic sales, while expanding foreign employment by less than growth in foreign sales. Handelsblatt reported that by 2017, some 36 percent of the total global workforce of DAX 30 firms was located in Germany, while only 21 percent of their sales occurred there. The difference—jobs integral to 15 percent of global sales by these enterprises—reflects the resistance of codetermination boards to offshoring.

This focus on domestic employment has not dimmed the DAX 30 investment abroad.  These companies are also huge international investors, with Daimler and Siemens alone owning over 70 U.S. plants. But they also have retained and created a far higher share of skilled, well-compensated jobs domestically than U.S. companies have.

Codetermination has proven to be the most effective version yet devised to realize Adam Smith’s hopes for a market-based capitalism that engenders widely based prosperity. By injecting codetermination to the American political debate, Democrats have taken an important step to upgrade the American middle class. But they may also upgrade American democracy.

Everyone should have a voice in American democracy, including at work where so many hours are spent. There are obvious complementarities between codetermination and giving new voice to citizens in other labor markets institutions, including collective bargaining, employers’ associations and works councils. Giving voice to citizens at their worksites is an important cultural adjunct strengthening communitarian values and expectations of responsive public officials that are central to a high-quality democracy. Indeed, the Bertelsmann Foundation’s 2018 global assessment concluded that the five highest-qualitydemocracies were all adopters of codetermination. Its panels of international political scientists judged the quality of American democracy—how well citizen voice or public sentiment is reflected in government policies—to rank only 18th. Separately, the Freedom House annual international update on the global State of Liberty found that freedom and political rights were also stronger in each of the major adopters of codetermination than they were in the U.S.

Redressing the low quality of American democracy poses major challenges, of which Trump is just one element. But with its promise of empowering many more voices, codetermination offers a valuable pathway forward to improving the quality of American democracy itself.